Oil Decline Likely to Benefit Food Prices

Falling oil prices in recent months dramatically reduced prices at the gas pump, which in turn contributed to a spike in consumer confidence early this year. But there's another place where low crude prices will likely benefit pocketbooks: the supermarket.

Mnet 141868 Food Price Picture Lead

Falling oil prices in recent months dramatically reduced prices at the gas pump, which in turn contributed to a spike in consumer confidence early this year.

But there's another place where low crude prices will likely benefit pocketbooks: the supermarket.

A recent report found global food prices fell 2.8 percent in late 2014 to their lowest level in four years, with food becoming cheaper in 79 of the 109 nations reviewed by the Economist Intelligence Unit. Analysts expect crude prices that continued to fall heading into 2015 to further benefit food prices this year.

"During the last 25 years, food and energy prices have tracked each other closely, so cheaper crude oil usually means more affordable food," said Leo Abruzzese, Global Forecasting Director for the EIU.

Lower fuel costs ease the expense of transporting food both domestically and internationally. They also alleviate the costs for farmers to operate agricultural machinery, which primarily use diesel fuel. Although retail diesel prices haven't fallen nearly as dramatically as gas prices, off-road diesel–which isn't taxed by state or federal regulators–reportedly hovers around $2 per gallon.

Crude prices also affect farmers indirectly. Oil is used in a wide variety of agricultural chemicals, and lower oil prices also reduce the demand for biofuels, thereby stemming demand for corn and other agricultural products used in biofuel production.

Oil prices, however, aren't the only reason food prices are down. The EIU report expects soybean production to set a new record, with corn production at a similar pace.

And although forecasters expect oil prices to remain well below their mid-2014 peaks, the market has experienced dramatic swings in recent weeks amid production cuts and continued high inventory levels. An ongoing strike affecting the nation's oil refineries has also fueled speculation about rising prices.

Consumers, meanwhile, aren't extending their overall economic optimism to their expectations on gas prices. A recent survey showed consumers expect gas prices to climb $1 in the next five years, the largest predicted increase in five years.

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